Reclamation by Moonlight

By Regan Boychuk

Reclamation by Moonlight

Protecting Albertans from insolvent polluters & captured regulators

By Regan Boychuk

The sun set on Alberta’s conventional oilpatch in 2010 and it has been operating by twilight ever since.

While bitumen production from the tar sands has grown into a world-significant source of oil, the vast majority of Alberta’s conventional crude and natural gas have long since been produced. What remains is not just environmentally challenging to produce, it also happens to be uneconomical.

The province’s conventional industry now spends more fracking than they generate from oil and gas sales, totalling dozens of billions in ongoing losses.

But before the last light fades on Alberta’s conventional fossil fuel industry, the dilemma of reclaiming a century of poorly regulated oil and gas development remains.

Albertans have relied on the provincial energy regulator to protect the public interest and ensure the polluter pays, but our regulators have long since been captured by industry and have shed very little light on an industry intending slip away from its liabilities into the looming darkness of bankruptcy.

The loophole
The provincial license for every oil or gas well, pipeline, and facility comes with the legal obligation to return the site to near its original condition. But there is a loophole in Alberta: There is no timeline spelling out when a well/pipeline/facility has to be reclaimed.

Left to decide for themselves, profit-maximizing corporations have all too often opted to keep inactive wells sitting idle for decades rather than clean them up.

They also choose to keep uneconomic wells active because a small operating loss is preferable to the much larger costs to remediate and reclaim a well.[1] But the fossil fuel industry is not going to be around forever. There is a limit to how long Alberta can keep kicking the reclamation can down the road.

There are more than 330,000 active and inactive wells in Alberta that eventually need to be remediated and reclaimed. Over the last 15 years, the average cost of plugging, remediating, and reclaiming a well in Alberta has been $329,961.[2]

That means Alberta’s crude oil and natural gas industries have accumulated more than a hundred billion dollars in unfunded well reclamation liabilities. How could things have ever gotten so bad?

History repeats one last time
This isn’t the first time Alberta has been forced to face the prospect of bankrupt oil and gas companies skipping out on cleaning up the mess they profited from. When a surge of Saudi Arabian production created a glut and collapsed the price of oil in 1986, a string of bankruptcies in Alberta forced the government and regulator to consider how to deal with companies disappearing and leaving their environmental liabilities for someone else to deal with.

A small joint government/industry fund was set up, but both bankruptcy law[3] and Albertans’ sentiment towards the environment[4] were both in flux at the time, and more needed to be done.

How to ensure companies respected their reclamation obligations was never complicated. In 1989, Alberta’s Department of Energy was considering three simple changes that would have effectively prevented the problem of unfunded reclamation Alberta faces today.[5]

But the changes were never implemented. The reason was the power of the oilpatch.[6]

Polluter-pays avertedIn the early 1990s, the problem of reclamation and how to solve it was recognized, the courts had established the province’s power to deal with the issue, and there was still enough profit left in Alberta’s crude oil and natural gas industries to pay for the cleanup.

But then Ralph Klein became premier.

Klein’s government swiftly abandoned the province’s power to hold oil companies accountable, and instead, what became the Orphan Well Association (OWA) was established.

In the 25 years since, the largely industry-funded OWA has cleaned up ~700 wells. In the meantime, however, more than 250,000 more wells were drilled in Alberta – for which there is virtually no money set aside for eventual reclamation.

After 75 years of oil and gas development,[7] when Alberta courts affirmed in the 1991 Northern Badger decision that oil and gas producers could be held accountable for cleanup costs, even in bankruptcy, this led to what should have by then been an anticipated reaction by industry: they shifted liabilities to smaller and smaller companies to shield shareholders from eventual liability.[8]

The number of oil and gas producers in Alberta climbed from a few dozen in the 1980s, to over 1400 by 2004.

As a joint provincial government/industry committee noted the year after Northern Badger, there was an increasing number of well transfers appearing to be attempts to avoid reclamation responsibilities.

New companies with “inadequate financial resources to meet future well-abandonment liabilities” were taking responsibility for wells from established companies. In a number of cases, “well-licence transferors have disposed of valuable assets, leaving only liabilities within a corporate shell and thereby generating future orphan wells.”

Already in 1992, this was “contributing to growing fears of unmanageable future abandonment problems if issues are not addressed now.”[9]

Regulators capturedWhen the regulator’s Long-Term Inactive Well Program (LTIWP) was finally forcing oil and gas companies to plug wells inactive for more than a decade, the program was prematurely cancelled in 2000, 6 months after changes had been made to allow industry to loot it of the money it had collected.[10]

The LTIWP was replaced with the Licensee Liability Rating (LLR) program, which initially prohibited the transfer of inactive wells between companies. But industry pressure soon removed that constraint[11] and the game of oilfield liability hot potato has continued apace for another 15+ years.

Our politicians and regulators have watched for decades as hundreds of billions in unfunded oilfield liabilities accumulate. At the same time, industry extracted hundreds of billions in profit from public resources. Held accountable for the cleanup of their wells, virtually every conventional producer in Alberta has already been insolvent for many years. This has led to crippling policy inertia.

Any steps to increase Alberta’s royalty rates (already the lowest on earth) or require industry to honour their reclamation responsibilities are met with the threat of mass bankruptcy.

Market competitive royalties or well-understood reclamation obligations would not be the reason for industry bankruptcies, but they would be the excuse.

And the political cost of being blamed for the inevitable collapse of Alberta’s iconic industry would be very steep.

This is why Alberta now collects one-tenth the royalties Premier Ralph Klein did and why regulations have been continually relaxed to keep insolvent oil and gas producers from collapsing just yet.

This is Alberta’s conundrum: A dying industry is leveraging its inevitable collapse to draw out the clock and loot the last dregs of our conventional resources, with every intent of leaving Albertans to grapple with the consequences of the Patch’s environmental legacy.

But there are solutions…The scale and urgency of Alberta’s reclamation crisis is clear. The responsibility of the polluters is not in doubt. The practical question is how to escape the industry and regulators’ cycle of denial and collusion.

Putting Albertans back to work cleaning up old wells could fuel full-employment for decades.

The same workers and equipment currently idle and on sale could return to the field, reinvigorating the economy in every corner of the province and helping support a just transition from Alberta’s carbon economy.

SOURCES,LINKS, QUOTES & NOTES

[1]Another factor in the choice to keep uneconomic wells active is the fact oil and gas reserves cannot be reported as “proven” if they lay beneath an inactive well. The Canadian Securities Administrators’ National Instrument 51-101: Standards of Disclosure for Oil & and Gas Activities (2003) ‘was designed to improve the quality and completeness of reserves information available to the public and to prevent inappropriate or unsupported reserve estimates that may arise from inactive and suspended wells.’ Lynda Harrison, “New rules make inactive wells liabilities”, Daily Oil Bulletin, 29 September 2009.

As Orphan Well Association Manager Pat Payne explained, ‘some producers can see potential production in their wells and are reluctant to abandon them prematurely. They might also want to be able to indicate to shareholders that they have reserves, or potential capability, she added.’ Linda Harrison, “Industry on hook for growing number of orphan wells”, Daily Oil Bulletin, 3 December 2014.

“It was clearly not the intent of Congress that the federal bankruptcy proceedings should shield irresponsible polluters from environmental injunctions or shift cleanup costs onto taxpayers. The courts, however, have not succeeded in defining an appropriate solution for curbing bankruptcy abuse. …Although the provision’s [section 362(a)] legislative history plainly indicates that Congress considered a state’s enforcement of an environmental order an exercise of its “police or regulatory power,” courts have been unable to agree whether a cleanup order is essentially equivalent to a money judgment and is therefore outside the scope of the “nonmonetary judgment” exception, or whether, as a governmental injunction, it is not stayed by the filing of a bankruptcy petition.”

[4] Don Martin, King Ralph: The political life and success of Ralph Klein (Toronto: Key Porter, 2002), pp. 95, 101:

“Environmental concerns were rising to the top of the polls in the late 1980s… With the environment rated the top concern in public opinion polling, in 1989…”

“In the late 1980s, Canadians said that the environment was one of their main concerns. According to a [Centre de Recherches sur l’Opinion Publique] CROP survey published in June 1989, 85% of Canadians stated that they were prepared to pay more for environmentally friendly products. At the same time, people began to focus on the quality of life. In addition, according to the CROP survey, 88% of Canadians said they felt that public health was affected by pollution, 73% of respondents stated that pollution was a major cause of cancer, and 81% considered that pollution problems threatened the survival of the human race.”

Former ERCB chairman (1987-1994) Gerry DeSorcy recognized changes in public attitude towards resource development beginning in the late 1970s: “There were societal changes, and notably a growing willingness of the public to speak out. My dad did his complaining over a glass of beer with friends. He would no more have thought about airing those concerns with the authorities than flying through the air.” ‘When DeSorcy’s term as ERCB chairman ended a more environmentally conscious attitude prevailed. After retiring, he served as head of a public review of sour-gas standards, safety, and regulation. In that role, he had his finger on the pulse of the environmental movement. “I was surprised at the number of people—sound, responsible people that we talked with one-on-one, not just at town hall meetings—who said, ‘I’m not sure it’s worth it any more.’ As a society we changed from one that said, ‘Isn’t that awful but we’ve got to do it,’ into one that says, ‘There’s no room for error.’”’

“The Department of Energy is considering changes to the Mines and Minerals Act to the effect that

(a) the obligation to abandon a well or to reclaim the surface survives the expiration of the lease and the lessee shall indemnify the Crown for any costs associated with the abandonment or reclamation;

(b) the transfer of a lease will not relieve the transferor of this obligation if the transferee fails to honor it;

(c) there may be provision for the well to be abandoned within a set time after the lease expires.”

[6] For a serious and careful examination of the power and influence of Alberta’s oilpatch, see Kevin Taft, Oil’s Deep State: How the petroleum industry undermines democracy and stops action on global warming—in Alberta, and in Ottawa (Toronto: James Lorimer, 2017).

“Only two things seemed to matter during those glory days of the oil boom: getting it out of the ground and getting paid for it. No one worried too much about dumps of oil, drilling chemicals and sludges at the well site. Just bury it. Spills of oil and salt water were unpleasant, but considered a price of doing business. When reserves of conventional crude oil peaked at 1.2 billion cubic metres in 1968, environmental regulations in the oil business scarcely existed.”

“Reclamation was the least of drillers’ concerns when the field was developed in the late 1940s. There were no reclamation guidelines, and topsoil salvage wasn’t required until 1978. …Drilling fluids, garbage and some toxic waste such as lead-based pipe joint compounds went into sumps which were later filled in with no record of where they were.”

“…a major option to minimize liability exposure is for firms to segregate risky activities in small corporations. Such segregation becomes valuable when latent injuries later manifest themselves and the claimants are restricted to the assets of the small corporation to pay the associated liability damages. The primary focus of the paper is to present empirical evidence that suggests that such firm efforts to avoid liability are widespread. This empirical evidence is generated by econometrically analyzing the pattern of entry by small corporations into the US economy over the period 1967-80. The analysis shows that changes in potential liability appear to be closely linked to substantial increases in the number of small firms operating in hazardous sectors. The entry of these small firms, moreover, seems designed primarily to avoid liability.

…When divestiture is common, the implication is that firms must believe that there are significant cost savings from reduced expected liability payments. Hence if divestiture is common, the implication is that the liability will not generate appropriate incentives for safety or compensation to the injured. Instead liability merely leads to corporate restructuring, small-firm operation of hazardous tasks, and high firm turnover rates. The result is a system with questionable incentive properties. The key to the evaluation of the liability system, then, is to examine the extent of divestiture.

…The magnitude of these effects suggests substantial efforts by firms to avoid possible liability costs associated with latent hazards. …Large numbers of small firms are entering hazardous sectors. The large magnitude of these effects, moreover, suggests that at least in significant sectors of economies of internal organization appears to be small relative to liability costs. Hence restructuring appears to be a path that firms are pursuing in significant numbers in efforts to avoid liability. These findings raise substantial questions about likely future problems in enforcement for tort liability in the case of latent hazards.

…Moreover, when liability leads to a preponderance of small firms and rapid turnover in hazardous sectors, it undermines the accumulation of experience in dealing with hazards, so that safety does not rise with the accumulated lessons of the past. …The implications of these findings, then, is that liability for latent hazards differs substantially from other forms of liability because of the potentially significant problems posed by enforcement. Moreover, there does not appear to be a simple remedy to these enforcement problems that preserves liability’s traditional incentive characteristics.”

[9]Orphan Well Steering Committee, Well Licence Criteria Subcommittee, “Specific criteria to be applied by the ERCB when a well licence is issued or transferred [DRAFT]”, 18 November 1992, pp. 1, 7:

“An increasing number of corporate insolvencies, bankruptcies and reluctant licensees, coupled with rationalization activities that are shifting assets between different sectors of the industry, are all contributing to growing fears of unmanageable future abandonment problems if issues are not addressed now. …The number of transfer applications that appear to be an attempt to avoid abandonment responsibility, have increased in the past several years. …The licensee profile has changed rapidly over the past 12 months. There is an increasing number of new licence applicants who are relatively unsophisticated in the industry, with limited understanding of the obligations and risks associated with holding a licence. …An increasing number of licence applicants have inadequate financial resources to meet future well-abandonment liabilities. In many cases, the applicant does not recognize that such a responsibility exists. …In a number of recent cases, well-licence transferors have disposed of valuable assets, leaving only liabilities within a corporate shell and thereby generating future orphan wells. …There is an increasing incidence of new licence applicants who have a previous record of corporate deficiencies, both within direct and associated companies. Deficiencies include failure to respond to ERCB directives, unpaid surface/mineral lease rentals, etc.”

“Effective immediately, upon request, the Alberta Energy and Utilities Board (EUB) will adjust transferors’ and transferees’ base well count for long term inactive wells contained within a well licence transfer package. …The EUB will also consider applications to adjust base well counts for companies that were involved in transfers approved prior to the issuance of this interim directive.”

“the EUB, with the support of both the Canadian Association of Petroleum Producers and the Small Explorers and Producers Association of Canada, has decided to [] cancel the current program, effective immediately. The requirements of the LTIWP [Long Term Inactive Well Program] have been made redundant with the introduction of the new corporate licensee liability rating (LLR) assessment. …Abandonment deposits currently held by the EUB for long-term inactive wells will be retained in order to ensure the continued protection of the Orphan Fund. The EUB will consider refund requests in accordance with the existing LTIWP refund policy until LLR assessment processes are implemented. At that time licensees may be eligible for a refund of all or a portion of their abandonment deposit based on their LLR rating.”

‘The Orphan Fund advisory committee has appointed a joint government and industry technical committee to review new security deposits for the transfer of liabilities for abandoned wells and facilities. …formed this week after industry groups raised concern about the potential impact of the deposits’